How do chained hotel brands make money?

You must be familiar with famous chained hotel brands such as Marriott, Sheraton, Hyatt, Accor or IHG. They are affiliated with a huge number of hotels across the globe. But how do they actually make money? Below is a snapshot of how such brands generate revenue

The bulk of their revenue comes in the form of management and franchise fees. 77% of IHG revenue in 2018 came from management and franchise fees. The figures for Marriott and Accor are 82% and 93% respectively.

Source: IHG 2018 Annual Report

Additionally, these fees typically have very high margin as the expenses are low. The hotel chains receive compensation for their brand power and expertise, which can be easily leveraged. In 2018, the fee business margin for IHG after overheads is 52%, compared to the 7% of owned, leased and managed lease.

Source: IHG 2018 Annual Report

That is why, at the hotel chains, sales department has a target to hit in terms of how many hotels are to be signed in a period. The more hotels are signed, the more fees will flow into these chains.

CrowdStrike looks impressive in their IPO filing

Today, the security startup CrowdStrike filed to go public and the numbers look impressive in my opinion.

Company background

Founded in 2011, CrowdStrike is a cybersecurity startup that offers their services mainly on a subscription basis. The primary offerings include endpoint security, vulnerability management, threat intelligence and a PaaS solution for cybersecurity.

Growth

  • Subscription customer base grew from 1,242 at January 31, 2018, to 2,516 at January 31, 2019 – a 103% increase
  • Customers include 44 of the Fortune 100, 37 of the top 100 global companies, and nine of the top 20 major banks
  • Total revenue grew from $52.7 mil in 2017 to $119 in 2018 and $250 mil in 2019, an increase of 125% and 110% respectively
  • Subscription revenue grew from $38 mil in 2017, to $92.6 mil in 2018 and $219.4 mil in 2019, an increase of 144% and 137% respectively
  • ARR growth is impressive as shown below
GRAPHIC
  • Dollar-based net retention rate grew from 104% in Q4 2017 to 147% in Q4 2019
GRAPHIC
  • 23% of the company’s revenue came from customers outside of the US in 2019, up from 13% in 2017

Partner & Customers

  • CrowdStrike is deployed on AWS GovCloud after receiving FedRAMP recently
  • Dell & SecureWorks use CrowdStrike’s endpoint security solution
  • Customers include AWS, HSBC, ADP, Hyatt Hotels, The Pokemon Company

Listed Competitors

  • McAfee, Symantec, Palo Alto Networks, FireEye, Cylance and Carbon Black

Financials

  • The company grew the top line significantly while the operating loss had a much smaller increase
  • The increasingly profitable subscription that already has higher gross margin than professional services makes up a bigger piece in the revenue while expenses are better leveraged

Thoughts

The company claimed to have a TAM of $24.6 billion and $29.2 billion in 2019 and 2021 respectively. It is a huge market and as companies go digital and have increased exposure due to more endpoints, more data, more cloud environments and more applications, the cybersecurity need will be there. With that being said, it is also a competitive market. Not only are there quite tough competitors such as Palo Alto Networks, McAfee, Symantec, FireEye, but there are also some smaller ones and on top of that, public clouds such as AWS or Azure also have their own security offerings.

I don’t know how they will compete moving forward, but the numbers look pretty good so far. Like many enterprise SaaS companies filing to go public, the company hasn’t been profitable operationally yet, but the situation looks promising with increased revenue and leveraged expenses. Their growth in ARR, negative churn and customer base is impressive. At least, there is a reason to believe that they are heading to the profitability land.

The partnership with Dell, I think, will be very helpful moving forward.

Recommendation to Vietnamese Tourism Board: Make data accessible and easy to process

I love my country. I want to promote my country as much and as honestly as I can. Given my past experience in the hospitality industry, I am a bit drawn towards reading and writing about it. I really want to do some analysis on the arrivals to Vietnam, but the government body responsible for recording data makes it annoyingly challenging for me to work with the data.

Problem 1 – No excel files

First of all, there is no feature on the website to download data in an Excel file. You have to download data and put it yourself in an Excel file. On the other hand, the Singapore Tourism Board makes it super easy to store data on an annual basis as you can see below

Source: Singapore Tourism Board
Each file stores data by month

Problem 2 – Inconsistent naming and order of entries

Copying data from an HTML table wouldn’t be so bad if the order of entries stayed the same across the tables. However, it isn’t the case. The order is all over the place as you can see below. Countries are mixed up differently from one month to another

Even that is the case, vlookup can still help overcome the challenge. However, vlookup requires consistency of variables’ names. In the screenshot above, Cambodia is spelled differently in April and March 2019 reports.

Problem 3 – Redundant variables’ names

Redundant variables’ names like in the screenshot above violate the integrity of data. If you use vlookup, the results will be redundant and inaccurate.

Given how they display the data online, I don’t have much faith that internally, things are different. My bet is that there is no data-centric approach and even if data is used, it must be a time-consuming, laborious and primitive endeavor.

Uber, Lyft Driver Strike & The Role of Regulators

Yesterday, there were reports on the upcoming strike by Uber and Lyft drivers ahead of the former’s IPO in order to demand minimum or at least higher wages for drivers. Despite claiming that drivers are an indispensable part of their business and having programs such as Lyft Direct or Lyft Driver Centers to support drivers, the ride-sharing companies employ the ones behind the wheels on a contractor basis, not a permanent basis. Hence, drivers are less protected by the laws regarding their benefits.

The thing is that these strikes, in my opinion, are unlikely to change the status quo. First of all, Lyft and Uber lose millions of dollars every quarter. Even if they wanted to help out drivers, I don’t think they would prioritize it over keeping the expenses down. Secondly, I don’t think they want to. Lyft and Juno sued NYC to block the minimum wage bill. Though they may argue the bill will tip the advantage towards a larger business such as Uber, it is clear that they care more about their survival than the drivers, as most of us would if we ran a business like that.

It brings me to the role of regulators. NYC successfully enforced the minimum wage bill. The likes of Uber, Lyft or Juno have no choice but to comply if they want to continue to operate in the Big Apple. It is something that other cities can emulate. Pass an official bill to raise the minimum wage. I don’t think these share-riding companies can afford to exit markets in America, especially bigger and more expensive ones like LA, SF or NYC. If driver minimum wages are raised, it will likely be more expensive for riders. Nonetheless, there will be opportunity for other businesses to come in and offer more affordable transportation alternatives.

While the strikes will bring more publicity and exposure to the issue, I don’t think it can be solved without the lawmakers.

Unsplash’s infrastructure cost and companies’ practice of sharing information

I came across a very interesting post on the infrastructure cost of Unsplash, a site that offers Internet users high quality images that can be used for commercial purposes for free. It’s a nice read to learn about the costs of hosting thousands of images that are accessed by millions of folks. However, what I want to talk about is the practice of (not) sharing information by companies.

Unsplash isn’t required to disclose this information. Yet, they did and I appreciate that a lot. Data and information shared in the post can act as useful reference in the future. The more information you know, the less likely you are on the undesirable end of asymmetric information. For that, thanks a lot Luke and Unsplash.

Nonetheless, you see publicly traded companies try hard to shield away information on important business segments. Take Google for an example. The company’s revenue still grew according to the last earning call, yet failure to provide sufficient insights on their YouTube business caused the stocks to drop significantly. They didn’t disclose information on Google Cloud Platform either. The Mountain View based company isn’t alone. Microsoft doesn’t separate out financial data of Azure and Office 365. Facebook aggregates data of their apps rather than individually report on each of them.

Obviously, I can’t speak for the companies on why they aren’t more transparent. On the other hand, the lack of disclosure comes with the lack of confidence and of the benefit of the doubt. It wouldn’t be surprising to see folks start to wonder: if things weren’t bad, what would they try to hide?

Comparing Enterprise SaaS Companies’ Metrics

Interested in how enterprise SaaS companies whose some or all of their revenue come from subscriptions, I set out to collect data from the companies that I know offer subscriptions to enterprise customers. Please be aware that this is my personal research stemming from intellectual curiosity only. They are not meant to be anything more than that.

  • Data is collected from the latest year in the companies’ latest annual reports to ensure that seasonality factor is removed
  • The metrics include subscription gross margin (subscription gross profit/subscription revenue), overall gross margin, Sales & Marketing expense as % of revenue, R&D as % of revenue, SG&A as % of revenue and net dollar expansion rate (or retention rate)
  • If there is a difference between subscription gross margin and overall gross margin, it’s because those companies also generate revenue from other sources such as hardware or professional services
  • Much as I tried to keep the figures accurate, do use them at your discretion

Subscription Gross Margin

Median: 82%/ Mean: 80%

Gross Margin

Median: 72%/ Mean: 71%

Sales & Marketing Expense as % of Revenue

Median: 44%/ Mean: 42%

R&D as % of Revenue

Median: 22% / Mean: 22%

SG&A as % of Revenue

Median: 15% / Mean: 15%

Operating Income (Loss) as % of Revenue

Median: -14%/ Mean: -10%

Dollar Expansion Rate

Median: 115% / Mean: 115%

Unsubscribe feature in the subscription world

We are living in the subscription world. Everything from enterprise technology to movies, clothes, food and news is offered on a subscription basis. A prominent feature in the model is that the suppliers allow users a short free trial (usually 7-30 days) before the first payment kicks in. As a consequence, offering an easy “unsubscribe” process is part of the customer experience. Unfortunately, different companies take different paths in this regard.

Take Netflix as an example. The video streaming service is so confident of its offering and obsessed with customer service that it has a feature reminding trial users of when to cancel. It’s smart of Netflix to do so. If users want to cancel trials, they’ll remember to do so. The number of those who forgot is not that many. Plus, being an honest and good company scores a lot of points in the users’ eyes, a far more important benefit in the industry in which there are a lot of alternatives. Technology can be copied, but good will from customers and a beloved brand are much more difficult to replicate.

Credit to Matthew Ball

On the contrary, take Wall Street Journals. If you are a subscriber, you have to call their Customer Center in order to unsubscribe. There is no online feature that allows you to cancel your account. A call to any customer center in the US, as you may know pretty well, isn’t a pleasant experience. They make it much harder for subscribers to leave. Though I subscribe to their service, I don’t appreciate the hurdles I will have to go through to unsubscribe. If there is any alternative coming along in the future with a feature like Netflix’s, a time-consuming call won’t stop me.

iPhone sale slowed down, iPad and Services impressed

Highlights from the press release and earning call

  • iPhone sale down by 17% YoY. Mac had a great quarter with a YoY increase of 21%. Mac had a 5% revenue decline compared to last year
  • Half of the Mac customers during the quarter were new to Mac and the active installed base of Macs reached a new all-time high
  • 75% of the Watch customers never owned a Watch before
  • Apple Pay transaction volume more than doubled year-over-year and on track to reach 10 billion transactions this calendar year. Apple Pay is now available in 30 markets and will be live in 40 markets by the end of the year. New York’s MTA system will begin their rollout in early summer.
  • 390 million paid subscriptions at the end of March, an increase of 30 million in the last quarter alone.
  • “As we mentioned in January, we’ve been working on an initiative to make it simple to trade in our — trade in a phone in our store, finance the purchase over time and get help transferring data from the old phone to the new phone. As part of this initiative, we rolled out new trade-in and financing programs in the U.S., China, the U.K., Spain, Italy and Australia. The results had been striking. Across our stores, we had an all-time record response to our trade-in programs and with more than 4 times the trade-in volume of our March quarter a year ago.”
  • All-time services revenue records in four of our five geographic segments. Services accounted for 20% of March quarter revenue and about one-third of gross profit dollars.
  • “In fact, the number of paid third-party subscriptions increased by over 40% compared to last year in each of our geographic segments. And across all third-party subscription apps, the largest accounted for only 0.3% of our total Services revenue.”
  • Wearables business grew close to 50%
  • Total cash, plus marketable securities: $225 billion. Total Debt: $113 billion
  • App Store search ad business: up around 70% over the previous year and expanding into new geographies
  • An additional $75 billion for share repurchases is authorized

Note: In the following chart, Other Products refers to Wearables, Home and Accessories . I tried to update the historical figures as much as possible, but there might be some discrepancies to the latest ones.

Revenue in Q2 2019 is down by 5% YoY

iPhones and Mac disappoint while the other segments impress year over year

iPhone and Mac’s makeup of Apple’s total revenue continued to decline. Services and Wearables/Home/Accessories become increasingly more significant

Revenue from Greater China as % of the total revenue continues to slide while Americas’ share went up this quarter

Both Gross and Net Margin decline year over year

QuarterGrossMarginNetMarginR&D/RevSG&A/Rev
Q2 201439.32%22.40%3.12%6.42%
Q2 201540.78%23.39%3.31%5.96%
Q2 201639.40%20.80%4.97%6.77%
Q2 201738.93%20.85%5.25%7.03%
Q2 201838.31%22.61%5.53%6.79%
Q2 201937.61%19.93%6.81%7.68%

Dividend growth decreased compared to last year

My thoughts

Though revenue went down compared to last year, it’s not that bad in my opinion. It is almost on the same level as Q2 2015 when iPhones made up 70% of the total revenue. Services, iPad and Wearables seem to be able to make up, at least for now, some of the lost revenue from iPhones. The continued drop of Gross Margin is concerning and so is the almost 3% decline in net margin.

As customers prefer keeping and using their phones longer and Apple is losing ground in China, a major market for the iPhones, I think the iPhone share in the revenue pie will become smaller while Services will be more important to the company’s health. Tim Cook wasted no time on emphasizing that this is the best quarter for Services as it made up 20% of the total revenue and 1/3 of the total gross profit. Much time was spent on a whole range of services. I look forward to seeing the remaining two quarters of the year and the first of the next year after many services announced last month debut.

I actually prefer the trade-in initiative to lowering the prices as the initiative will likely not dilute the brand value as much as price cuts, especially for a luxury brand such as Apple. It’s promising to see the response to the new trade-in program.

While it’s interesting to see a significant growth in the App Store search ad, I am concerned about what it would do the image of a privacy-focused brand such as Apple. Ads and privacy don’t actually go hand-in-hand.

Disclaimer: I owned Apple stocks. This post is a practice exercise and stems from my curiosity. It’s not intended to be investment advice or anything of the sort. I am not that good lol.

Sources:

https://www.apple.com/newsroom/pdfs/Q2%20FY19%20Consolidated%20Financial%20Statements.pdf

https://investor.apple.com/investor-relations/financial-information/dividend-history/default.aspx

https://seekingalpha.com/article/4258275-apple-inc-aapl-ceo-tim-cook-q2-2019-results-earnings-call-transcript?part=single

Avengers: End Game and The Acquisition of Marvel

I went to see the Avengers: End Game on Friday with a few friends. The movie is indeed worth the wait and the hype, in my opinion. Rest easy. I won’t give out any spoilers. I was floored by the attention to details and the extraordinary cinematography put in the film. The plot was as good as you could get. Of course, there is no plot that can satisfy all the fans out there, but it would be a tall order to beat what the writers put together. So kudos to them. If you haven’t watched it yet, do it before any spoilers come out. There are moments in the movie that I believe should only be watched in real time. If you can, watch the Marvel movies you haven’t beforehand. There are some details in the End Game that require some context to be understood.

The End Game is a great culmination of a tapestry of 21 or 22 movies in the Marvel Universe. Marvel has left quite a bit of cultural influence in our societies such as Black Panthers or Captain Marvel and become an established household name. It is now a great asset for Disney. This brought me back to the acquisition. The studio was bought by Disney for $4 billion back in 2009. Since then, the studio has churned out one blockbuster after another. Below is what Marvel movies have generated in revenue after 2009

Source: Boxofficemojo

It’s necessary to point out that The End Game has been out for only 5 days and the figure above is not updated yet. In a few months, the chart above will look different and you will likely have to look to the left hand side for The End Game

In terms of financials, the $4 billion outlay back in 2009 looks like a tremendous bargain now. In total, the studio has brought around $19-20 billion in revenue. I imagine it will be more profitable for Disney if it keeps the quality of the movies like it has been for the last 10 years. No one can know for sure, but a good sign is Star Wars and Disney movies which have been still popular even after many years.

Take-aways from Slack IPO Filing

Yesterday, Slack filed to go public. In this post, I am laying out what I learned from reading the document

  • In the three months ending 31st January, 2019, there are more than 10 million Daily Active Users; 500,000 register developers; 450,000 third-party applications; 50 million collective usage hours; 1 billion messages sent
  • There are more than 500,000 organizations on free subscription and 88,000 paid customers, including 65 companies of the Fortune 100. Slack’s competitors include Facebook (Hangouts), Google (Workplace) and Microsoft (Teams). Even though Microsoft announced that there are 500,000 organizations using the service, including 91 of the Fortune 100, it’s tricky to form an apple-to-apple comparison. Teams can be used either free-of-charge or part of a paid Office 365 plan. There is no detail yet on what makes up the 500,000 figure.
  • Annual revenue was recorded at $105.2 million, $220.5 million, and $400.6 million in fiscal years 2017, 2018, and 2019 respectively
  • Out of the total revenue, international revenue represents 34%, 34% and 36% in 2017, 2018 and 2019 respectively
  • In fiscal years 2017, 2018, and 2019, approximately 22%, 32%, and 40%, respectively, of the annual revenue was generated from Paid Customers >$100,000.
  • In the fiscal year ended 31st January, 2019, 8% of the annual revenue came from customers who used the free plan prior, down from 10% a year before
  • “More than 90% of Paid Customers used a third-party application or custom integration in the week ended January 31, 2019”

Impressive Growth of Paid Customers >$100,000

The CAGR of Paid Customers whose ARR is bigger than $100,000 is impressive. So is the CAGR of the revenue, gross profit and calculated billings. Though Slack hasn’t made money from its operations, the loss has contracted through the quarters at the rate of 7.50%. Net Dollar Retention Rate has slowed down.

When looked at from an annual basis, the growth of the Paid Customer > $100,000 is even more impressive.

YearRevenueCost of RevenueGross ProfitR&DS&MSG&AOperating Income (Loss)
2017100%14%86%92%99%36%-141%
2018100%12%88%64%64%26%-65%
2019100%13%87%39%58%28%-38%

From the Annual CAGR chart, the scale of economies seems a bit clearer as expenses don’t grow at the same clip as revenue and gross profit. In terms of breakdown of revenue, Operating Loss as % of Revenue has been decreasing quite rapidly, along with R&D and Sales & Marketing. For the last two years, most of the improvement in Operating Loss came from R&D spending as % of Revenue. There is not much more that can be said about it definitely. Perhaps, Slack feels that there is enough investment and sufficient talent in R&D, meaning that it is not necessary to waste valuable dollars.

As % of Revenue

Reliance on AWS and Ramifications

For instance, Slack currently only utilizes AWS data centers located in the United States but certain organizations, or categories of organizations, may limit their adoption or use of Slack unless we also utilize local AWS data centers, such as data centers in Europe, Asia, and Latin America.

For example, Russia and China are among a number of countries that have recently blocked certain online services, including AWS, which hosts Slack, making it very difficult for such services to access those markets. 

From 2018 to 2023, Slack commits to spend $50 million each year on AWS

It’s going to be a direct listing

It means a less expensive process for Slack. The current stockholders are not under a contractual lock-up agreement. If enough stocks are sold when or shortly after Slack goes public, it may cause the price to contract.

They have negative free cash flow in all, but one quarter